The U.S. stock market has weathered volatile news recently, mostly surrounding tariffs and the resignation of White House economic adviser Gary Cohn.
The market has pulled through quite bullishly, and the indicators are rolling over to “buy” signals to confirm it. It is appearing more and more likely that there will not be a retest of the February lows anytime soon, but things can change in the future.
The S&P 500 Index SPX, -0.13% chart has improved greatly. The 20-day moving average and the “modified Bollinger Bands” have curled upward. That is a positive development, for that aspect of the chart is no longer in a downtrend. There had been a row of daily highs at 2,730 points, which represented near-term resistance, and Friday (March 9) SPX blew through that level with authority.
The next upside target then became the late-February highs at 2,790. The SPX traded right up to that level by Friday’s close. Today (Monday, March 12) SPX penetrated above 2,790, but then has fallen back. If that resistance at 2,790 is overcome on a closing basis, then the SPX chart will be in a pattern of higher highs and higher lows since the early February lows, and the chart would be distinctly bullish.
As it is now, it’s modestly bullish (certainly no longer outright bearish), but until that resistance is overcome, one could still say there’s a downtrend on the SPX chart from the late-January highs through the late-February highs.
Also, the modified Bollinger Bands (mBB) are now contracting and rising. The target for the early February mBB buy signal (which is still in effect) is the upper +4σ Band, currently at 2,820 and falling. It is still possible that that target could be achieved. The Bands are tightening, reflecting the decline in realized volatility.
Finally, if things do deteriorate, there is support at 2,650 (the March 2 lows) and then at roughly 2,570, where there is a confluence of the lower mBB’s and the rising 200-day moving average (the gently rising line on the lower half of the chart in Figure 1).
A major intermediate-term bullish development is that the equity-only put-call ratios have rolled over to buy signals. This happened just recently, so these are fresh signals. The weighted ratio’s buy signal came from an extremely high (oversold) level — highs last seen in November 2016 at the time of the election. This should make this signal an even more attractive one. The standard ratio did not rise far enough to exceed its 2017 highs but is still on a buy signal from a relatively high level, nonetheless.
Market breadth has improved over the past week, and both breadth oscillators have risen into modestly overbought territory. That places them on buy signals, canceling out any previous sell signals. It is favorable for the bulls that these are overbought in the early stages of a breakout advance. As we mentioned previously, these breadth oscillators sometimes move so quickly that they give false signals, but in this fast-moving market they have been more reliable.
New highs are beginning to outpace new lows once again, turning this indicator cautiously bullish. New highs finally climbed above 100 issues on March 8 for the first time since Jan. 29. A lot of negative action has taken place since Jan. 29, so this is perhaps a sign that the worst is over — at least for now.
Volatility indices have generally continued to decline, although there seems to be some demand for protection, which keeps VIX from collapsing altogether. Considering what has happened in the last month, it is not surprising that traders are still willing to pay up for protection. On March 2, there were three (repeat) volatility buy signals: there was another, overlapping VIX “spike peak” buy signal, coupled with a “VXST crossover” buy signal, and a “VIX crossover” buy signal.
However, the trend of the VIX chart is still (barely) upward. It would take a clear move below 15 by VIX (for more than one day), to the uptrend, in my opinion. The 20-day moving average of VIX has turned downward, which is further bullish information for stocks.
The construct of the volatility derivatives is trying to turn bullish, but it’s not as convincing as perhaps bulls would like to see. The nagging “problem” is that the VIX futures are just now edging to a very slight premium over VIX and their term structure is hardly rising at all. The CBOE Volatility Index term structure has a much more distinct upward slope. This disparity (divergence?) has existed for a couple of weeks now. When it first appeared, SPX seemed to be on its way higher, but then suffered the selloff of just over a week ago. Now the same sort of thing exists. So until the futures term structure improves, we cannot grade this indicator as truly bullish. It still seems to be warning of a possible downdraft — perhaps short-lived. There is not a lot of history for this sort of divergence, so we are treating it with caution.
In summary, the technical picture is improving. The SPX chart no longer slopes downward, and the index has overcome short-term resistance. The put-call ratios are now on buy signals, as are the breadth oscillators and short-term VIX indicators. What remains, though, is for SPX and VIX to clearly reverse their bearish trends (multi-day closes by SPX above 2,790 and VIX below 15 would accomplish that), and for the volatility construct to improve. Overall, this is the most positive set of indicators we’ve seen since the breakdown in late January.